Managing Inventory I: At Cost

by Olejuru Lanfear, Experienced Senior Merchandise Planning Professional & Author of ‘The Fundamentals of Planning’ August 26, 2021   After working for many years in different buying departments as a merchandise planner, I’ve used inventory valued at cost more times than any other method, so much so that it is my preferred method of valuing inventory. The main reason for this is that by using cost to value inventory, there is no need to revalue inventory whenever there is a change in price, due to temporary or permanent retail price changes. In other words, it is one less task for planners to maintain, especially as spreadsheets are still widely used to do a lot of planning calculations. Benefit There are a few benefits of valuing inventory at cost other than it giving merchandise planners one less task to keep on top of. Some of these benefits are:
  • A retailer knows how much capital is tied up in inventory
  • The frequency of inventory needing to be revalued is less, as cost prices change a lot less frequently than retail prices.
  • It is how much the retailer paid to acquire the inventory
  • The accounts department require inventory value at cost. 
Disadvantage The flip side of valuing inventory at cost is:
  • Not knowing at a glance how many potential sales can be achieved from inventory on hand, without performing a calculation.
  • Not knowing how much profit can be achieved from the inventory on hand
  • There is nothing to relate the cost value to for those who don’t have access to the cost of purchasing products, as cost prices aren’t shared with everyone, unlike the retail price that can be seen by everyone. 
Given the choice and as stated at the start of this post, my preference is to value inventory at cost, this may be because it is what I am used to. Managing inventory at retail and in units does have its uses and there are certain times when they come in handy, with that said, planning at cost still remains a little easier than managing it at retail or in units.